New regulations the first step towards condotel resurgence

09:00 | 24/02/2020
Several years ago, a large wave of condotels was introduced to the market across Vietnam. According to the Ministry of Construction, since 2014 the coastal areas and islands such as Van Don, Halong, Danang, Nha Trang, Mui Ne, and Phu Quoc have all seen a boom in condotel supply.
new regulations the first step towards condotel resurgence
By Michael Piro - COO, Indochina Capital

Between 2015 and September 2017, there were 71 licensed condotel and officetel projects corresponding to a total of 25,639 units. By the end of 2019, the proportion of condotel units surpassed the supply of hotel rooms (56 per cent versus 44 per cent).

The initial driving force for the condotel boom came from the idea that this product is more innovative than traditional residential or hotel products. It was a product that could promise higher financial returns in coastal or touristic locations and allowed buyers to capitalise on a hotel’s brand recognition, affiliations, reservation systems, and management expertise when managed by a renowned operator.Furthermore, developers who used guaranteed returns, pledging high profits with interest rates of 8-12 per cent per year over a period of 5-10 years to attract customers, only added fuel to the fire.

With the increased number of condotel projects, competition became fierce and developers started to offer higher guaranteed returns, some up to 15 per cent.

Experts started to voice their doubts on guaranteed returns and the lack of regulations for ownership certificationa and mechanisms to protect buyers.

On February 14, the Ministry of Natural Resources and Environment (MoNRE) issued Official Dispatch No.703/BTNMT-TCQLDD to local departments of Natural Resources and Environment (DoNREs) – a guideline clarifying regulations related to the licensing of the non-residential real estate projects, mentioning condotels. According to the document, condotels are categorised as facilities built for tourism accommodation purposes; therefore, the Law on Land classifies the land use rights of such developments as commercial land.

The state can lease the land to investors for commercial purposes for a maximum of 50 years, which can be extended up to 70 years for large-scale projects located in areas with less economic potential.

The document also reaffirmed that investors and buyers of condotel products can receive ownership certificates from DoNREs and asked local departments to review the eligibility of current projects.

For the Vietnamese real estate industry this is good news, as it indicates that the government is starting to warm up to the condotel segment and striving to eliminate the grey areas in land use regulations.

However, we must remember that the document does not assert that investors and buyers can obtain a red book from their condotels purchases, but it is, at the moment, clearing the way for the long-term certification of ownership.

Thus, we cannot expect this guideline to have a significant impact on the market just yet.

To complement the current guidelines, a clear legal framework defining the relationship between the developer, operator, and owner of a condotel unit, regulating the management of condotels and the market, is paramount. It is highly likely that the MoNRE will work with the Ministry of Culture, Sports and Tourism and the Ministry of Construction to continue to clarify regulations in order to create a transparent legal framework for future real estate developments that feature condotels.

Once the ownership issue is resolved, laws to further protect buyers and ensure viability for this type of product need to be implemented.

Regulations on guaranteed returns and on the pre-sale of condotels as a source for funding the development, as well as an assessment procedure for the financial and operation plans to ensure financial promises are kept, are highly recommended.

The state needs to hold developers accountable when they are promising ambitious guaranteed returns, as this will help build trust between real estate developers and buyers. Only then can we expect interest in this segment to be rekindled again.

Currently, the supply of condotels has already surpassed the supply of hotels; however, this is still a relatively new product offering and it lacks data to prove its effectiveness in generating high returns and contributing to sustainable growth in the local market.

If we observe other nations, hotel supply is always higher compared to that of condotels – in fact, Vietnam is the only market still avidly developing this type of product.

The risk of oversupply without clear long-term management and operation strategies is looming and is fuelled by the number of inexperienced developers who joined the condotel boom over these past few years.

This is another obstacle for the segment to thrive again in Vietnam; authorities need to become more selective and only grant permission to those they truly believe will help elevate the condotel segment in Vietnam.

The new document published by the MoNRE is a positive development, demonstrating the willingness to transform of the local real estate market. In the near future, condotel buyers can potentially expect a certification of ownership of land-attached assets, which is a step forward in protecting buyers and investors.

Nonetheless, a robust but clear legal framework for the sustainable development of condotels is required before we see significant investment from the leading real estate developers into this segment, as well as foreign investment into the development or acquisition of condotels.

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